Since BABA's second listing in Hong Kong on November 26, the share price of Ali Hong Kong shares has been higher than that of its US shares, making investors smell the opportunity for "arbitrage". Although this opportunity will not last forever, savvy traders have begun to profit from BABA's share of US stocks.

This technique is often referred to as "arbitrage"In "arbitrage" activities, traders take advantage of the differences in securities trading prices between different exchanges to make a profit.

Chinese e-commerce giant BABA listed for the second time in Hong Kong on Nov. 26, the South China Morning Post reported. Excitement in the market pushed up the price of shares in Ali Hong Kong-more than BABA's shares listed in the United States.At one point, BABA's price per share in Hong Kong was $7.68 higher than in New York.

Traders can use American depositary receipts (ADR) to convert their US-listed shares into higher-priced Hong Kong shares and then sell them to earn the difference.

Hong Kong traders raised the price of BABA's Hong Kong shares in part because they thought BABA would have more potential once BABA joined the trade link between Hong Kong and mainland China.

Mainland traders are looking forward to buying shares in BABA, a mainland e-commerce superstar, through the Shanghai-Hong Kong Stock Connect (Stock Connect). Chinese traders face many restrictions when trading overseas stocks, so they will instead buy shares of Chinese companies listed in Hong Kong through the Shanghai-Hong Kong Stock Connect, the South China Morning Post reported.

"the high price of Ali Hong Kong shares is normal because Hong Kong investors are more interested in the Chinese market and have a deeper understanding of Chinese market risks than US investors," said Karine Hirn, a Hong Kong-based partner at East Capital, which manages $5.4 billion in assets.BABA will also be included in the interconnection mechanism in six months' time.」

Investors in Hong Kong and the mainland have become accustomed to such share price differentials.

According to the South China Morning Post, it is not uncommon for Chinese companies to list in Hong Kong and the mainland, with an average share price gap of about 30%. There are significant differences in investment concepts among stock traders in different regions on the same investment project.

Although the two largest dual-listed Chinese companies, Ping an Insurance Group and China's Industrial and Commercial Bank of China, currently have a price gap of no more than 10%, for some small companies, the most extreme post-IPO gap may be more than 300%.

BABA's Shanghai-Hong Kong Stock ConnectThe road may not be plain sailing

BABA was included in the Hang Seng Composite Index today after issuing 101.2 billion Hong Kong dollars (91 billion yuan) in Hong Kong last month, the largest share offering in Hong Kong in nine years. The Hang Seng Composite Index covers a wider range than the Hang Seng Index of 50 Hong Kong-listed stocks, covering 481 stocks traded in Hong Kong.

Inclusion in the market index is a prerequisite for BABA shares to be included in the Shanghai-Hong Kong Stock Connect. According to the measures for the implementation of the Shanghai Stock Exchange's Shanghai-Hong Kong Stock Connect (revised in 2019) issued by the Shanghai Stock Exchange on October 18, the conditions for the inclusion of the Shanghai-Hong Kong Stock Connect also include the listing of Hong Kong stocks on the Stock Exchange for six months and the subsequent 20 Hong Kong stock trading days. and the average daily market value of Hong Kong stocks in the 183 days before the inspection (including the day of the study) is not less than 20 billion Hong Kong dollars (about 18 billion yuan).

Despite high expectations for BABA's planned inclusion in the Shanghai-Hong Kong Stock Connect, the move by China's securities regulators remains uncertain, according to the South China Morning Post.

Generally speaking, companies that have experienced a secondary listing cannot be included in the Shanghai-Hong Kong Stock Connect.. That means the China Securities Regulatory Commission may need to take special measures to allow the mainland to buy BABA's Hong Kong-listed shares.

For BABA, the benefits of including the Shanghai-Hong Kong Stock Connect are obvious.

Meituan is one of only two Chinese companies that have adopted a "dual ownership structure" (Meituan and XIAOMI).Since Meituan shares, which are included in the Shanghai-Hong Kong Stock Connect, have been able to be bought by mainland investors since Oct. 28, the price has climbed 14%, and the average daily trading volume has increased by 35% compared with the first half of this year.

"for BABA, the inclusion of this connectivity mechanism will be a catalyst in the short term," said Ken Chen, an investment analyst at KGI Securities in Shanghai. "usually, investors will be more willing and enthusiastic to invest in domestic companies, which is the same for both Chinese and US investors. "

The opportunity for arbitrage will not last forever.

According to the South China Morning Post, some investors, including HSBC Jinxin Fund Management Co., Ltd., believe that the price gap between BABA's Hong Kong shares and its ADR will close in the long run.

"the room for a higher premium will be limited because the valuations of these companies are very high," said Chen Yu, a fund manager at Jinxin Fund Management Co., Ltd.

"given that Hong Kong is still dominated by international investors, the impact of mainland investors on the overall market or individual stocks is still limited.As a result, it is unlikely that these companies will maintain long-term high premiums only through mainland investors. "

And there are signs that the premium is shrinking.

BABA's share premium peaked on November 28 since its Hong Kong share offering, which has since shrunk rapidly. According to the South China Morning Post, Ali Hong Kong shares traded at 197.5 Hong Kong dollars (RMB 177.5) per share when trading closed last Friday, while its ADR traded at US $200 per share in New York, which translates to a premium of HK $1.80 (RMB 1.60) over US shares because the ADR per share is equivalent to 8 Hong Kong shares.

And since BABA listed in New York in 2014,BABA's ADR has risen by 194%.

Investment banks expect BABA's Hong Kong shares to outperform their ADR. According to an analysis by Bloomberg, Hong Kong shares will rise 19% in the next 12 months, while its ADR will rise only 14% over the same period.

"closer to home or the domestic stock market usually contributes more to the performance of domestic companies," said Chen Ken of KGI Securities. "Local investors will have more extensive and direct access to relevant trading information, because they will feel more confident about investing in domestic stocks. "

However, taking advantage of the difference between Hong Kong and US share prices for "arbitrage" is not risk-free. According to Hong Kong Ta Kung Pao, although the exchange rate between the Hong Kong dollar and the US dollar is relatively stable, there is no immediate conversion between Hong Kong stocks and US stocks, and changes in stock prices may lead to the failure of "arbitrage" during the waiting period for conversion.